EV Dilemma: Finance Ministry Faces Challenges Amid Concession Debate

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On November 10, Finance Minister Prakash Sharan Mahat, speaking before the Finance Committee under the House of Representatives, highlighted how the concession on EVs was contributing to the shortfall in meeting the revenue collection target.

The Finance Minister reasoned that revenue was down because of a surge in the import of EVs and the concession provided on the EVs. He explained that while the government traditionally received a 300 per cent tax from the import of petrol and diesel vehicles, EVs were subject to lower tax rates ranging from 10 to 30 per cent.

“The decrease in revenue is mainly due to the promotion of EVs,” he said.

The government’s targetted revenue collection for the fiscal year 2023/24 is Rs 1.422 trillion. However, according to the Office of the Comptroller General, the government has only collected Rs 367 billion in revenue in the first five months of the current fiscal year. This amount accounts for only 25.83 per cent of the overall target.

The Office also said between July 17 and December 18, the Customs Department has only managed to collect Rs 136 billion, equivalent to 69.03 per cent of the Rs 197 billion customs revenue target.

In response to the observed shortfall in revenue collection and the government’s struggle to meet its current expenditure, the finance minister has consistently stressed, in various revenue-related meetings, the need to identify a basis and formulate plans for tax increases on certain commodities including EVs.

In these meetings, officials from the customs department, responsible for briefing on revenue collection, have also been accused of distorting data related to imports of EVs. The data presented allegedly reflects lower revenue figures compared to the actual number of EV imports.

Despite the government’s efforts to address the revenue issue, which included tax increases and reductions in concessions in the current fiscal year’s budget, the imports of EVs have risen significantly compared to last year. Consequently, the Ministry of Finance has expedited calculations to determine the potential tax collection from electric vehicle imports if the tax concessions provided to EVs are revoked.

EV import numbers

According to the Customs Department, the first four months of the fiscal year 2023/24 saw the import of 2,787 EVs amounting to Rs 6.86 billion. In contrast, only 1,893 diesel and petrol vehicles amounting to Rs 2.37 billion were imported during the same period. Surprisingly, while the government collected Rs 6.05 billion in revenue from petrol and diesel vehicles, it only collected Rs 2.96 billion from EVs.

Shobhakar Paudel, the Director General of the Customs Department, said that while not opposing the government’s policy of promoting EVs, the data suggests a need to reconsider the policy and reconsider the heavy concession imposed on EVs.

“If the tax was maintained at the same rate on EVs as compared to petrol and diesel vehicles, an additional revenue of Rs 16 billion would have been raised,” says Paudel. “If the government continues its concession on the import of EVs and it sees a rise like last year, the government will have missed out on around Rs 100 billion in revenue in 2023/24.”

‘Concession on EVs only benefitting the rich’

The Customs Department has been advising the Ministry of Finance to formulate a policy by examining and identifying the beneficiaries of the potential loss of Rs 100 billion in revenue per year.

“EVs were expected to reduce pollution and accidents and bring ease to the transportation system, but that has not happened,” says Paudel. “Is it not time we reconsider the concession?”

Paudel said that the general public has not been getting direct benefits from the concession on EVs and said it has been benefitting only the rich.

“Should the policy not benefit the common man/woman?” he questions.

Paudel now sees the necessity of analysing the return the state was receiving by providing a nearly Rs 100 billion concession as well as the potential damage caused by it on state coffers.

Stressing the need for clarity in the policy regarding EVs for five years, he said that the customs department is in favour of adopting consistent policies.

“We have informed the Finance Ministry about the impact of the existing tax policy on EVs based on facts,” he said. “We have also suggested a change in tax structure.”

Unison to increase tax on EVs

Finance Minister Mahat has also publicly accepted the conclusion of the Customs Department that revenue that can be obtained directly is lost due to concession provided on EVs.

According to officials overseeing revenue affairs at the Ministry of Finance, the recently reviewed monetary policy is expected to lead to a decrease in bank interest rates. This, they believe, will contribute to a boost in the vehicle business.

“Now is the era of EVs, and people are not solely attracted to them because of the price,” said an official of the Finance Ministry on the condition of anonymity.

The official expressed concern that if high tax rates are maintained on EVs, particularly those beyond the financial reach of the poor and lower-middle class, it could potentially escalate the country’s debt burden in the future. However, Finance Minister Mahat and finance officials claim that they are hesitant to change the policy of offering tax concessions on EVs as they do not want to become unpopular amongst the general public.

“They don’t want to be called out for walking in the opposite direction,” said the official.

According to the Ministry of Finance, a growing number of commoners, who recognise the positive aspects of electric vehicles, are likely to prioritise them due to their cost-effectiveness. This is why revenue officials are calling for a review of the concession on EVs.

“EVs have not had a major impact on petrol imports with it only going down by around 5,000 kilolitres in the first five months of the current fiscal year compared to last year,” said an official from the revenue department. “What has the concession on EVs done? Who has it helped? It is time we find an answer to that.”

EVs are the future

Since the government increased taxes earlier in the year, it has been accused of discouraging EVs. By increasing the tax on entry-level EVs, people have been accusing the government of taking a step back on its promise of achieving a net-zero emission by 2045. However, despite the price hike, EV sales continue to go up. This has given the Finance Ministry the confidence to reconsider the concession on EVs.

“The Finance Ministry was criticised that we were taking a step back by increasing taxes on EVs. But the last four months’ data show the government’s policy of moving towards zero carbon emissions will not be affected by this,” said a finance ministry source.

Officials now feel policy should be formulated to ensure a level playing field in the competitive market. There is a concern that the current tax concessions on electric vehicles are disproportionately benefiting certain importers leading to an uneven market advantage.

“The concession on EVs should benefit everyone we believe,” said the official.

Importance of thinking ahead

Former Finance Secretary Rameshore Khanal says that policies should not be formulated to discourage the use of EVs. However, he also suggests that it is appropriate to align with good international practices in tax policy.

“The tax policies on EVs changed as the finance ministers did. One came and reduced it because he felt like it while another increased it as it would boost revenue. This is not how things should be done,” he says.

According to Khanal, all European countries along with the United States, Canada, Australia, Japan, China, and India have implemented concessions to promote the adoption of EVs. He says these countries have adopted incentive policies, often up to a specified quantity. For example, in the United States, there is a policy of providing tax concessions and subsidies to each manufacturer for the production of EVs, with support up to a certain limit, typically set at 200,000 units.

“Policies like these have made EVs even more popular in these countries,” he says.

Tax experts also argue that evaluating the tax policy of EVs solely based on customs revenue collection may not provide an accurate conclusion. They argue that the benefits of EVs extend beyond lost tax revenue.

Mahesh Dahal, the chairman and former secretary of the Nepal Revenue Advisory Board, says that considering global practices, factors such as improvements in human health, positive environmental impact, reduced internal electricity consumption, and discouragement of petroleum product imports should also be taken into account.

He says as the government is pursuing a policy aimed at reducing reliance on petroleum, it should consider exploring alternative options rather than withdrawing the concession on EVs.

“We should conduct a cost-benefit analysis of the tax concessions granted to electric vehicles. Instead of revoking these concessions, the focus should shift towards transitioning the revenue system from customs to internal sources,” he says. “There is a need to broaden the scope of taxes to encompass other potential sources of revenue.”

 

Source: Online Khabar